The Plaintiff, YTO Construction Pty Ltd ("YTO"), was the principal contractor for a commercial/residential development in Ashfield, New South Wales. It entered into a subcontract for civil works with the Defendant, Innovative Civil Pty Ltd ("Innovative"), for $1.28 million.
Mr I. G. Roberts SC appears (with Mr Shipway) for YTO. Mr M. Christie SC appears (with Mr Hume) for Innovative.
One of Innovative's tasks pursuant to the contract with YTO was to remove soil and waste from the site. To that end, Innovative entered into further subcontracts with several haulage contractors, one of which is known as Elkordi Earthworx Pty Ltd ("Elkordi").
A dispute arose between YTO and Innovative which led to Innovative making a payment claim upon YTO within the meaning of the Building and Construction Industry Security of Payment Act 1999 (NSW) ("the Act"). YTO disputed that it was obliged to pay the $1.5 million claimed and the dispute was the subject of an adjudication before the Second Defendant, the Adjudicator, who determined that $1,535,377 was payable by YTO together with costs of the adjudication and interest ("the Determination").
In these proceedings, YTO claims that Innovative obtained the Determination by fraudulent means and seeks to have the Determination set aside.
I draw attention to the fact that under the scheme of the Act, the fact that a claim is required to be paid as a result of a determination now is in no way determinative of what amount ultimately will be payable to a claimant by the respondent to that claim. The purpose of the Act has been described by McColl JA in Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd (2017) 95 NSWLR 82 at [4] as providing a process (omitting footnotes):
"…to ensure that any person who undertakes to carry out construction work (or who undertakes to supply related goods and services) under a construction contract is entitled to receive, and is able to recover, progress payments in relation to the carrying out of that work and the supplying of those goods and services."
and in the High Court, in Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd (2018) 92 ALJR 248; [2018] HCA 4 at [40], the plurality of Kiefel CJ, Bell J, Keane J, Nettle J, and Gordon J, said of the Act (omitting footnotes):
"… underpinning the "interim" statutory entitlement is an understanding that "[c]ash flow is the lifeblood of the construction industry". Put another way, any interruption to the cash flow of a person carrying out construction work is apt to create the risk of financial failure. Consistent with that understanding, the procedure in Pt 3 is designed to operate quickly. So much is apparent from the detailed time limits that apply at each stage and have been described earlier in these reasons. These time limits are "carefully calibrated". The time limits have been rightly described as imposing "brutally fast" deadlines on the claimant, the respondent and the adjudicator to ensure the prompt resolution of payment disputes."
YTO has paid into Court a sufficient sum to meet the liability imposed by the Determination, but there is an urgency about this matter because Innovative, having obtained the benefit of the Determination, does not yet have the funds to which the Adjudicator has found it entitled.
The allegation of fraud made by YTO relates to one part of the Determination, namely, in respect of removal of waste from site, for which the Adjudicator allowed an amount of approximately $466,000 (and which forms part of the total $1.5 million awarded). There is a significant issue thrown up as to whether YTO's case, as advanced at the hearing, has been properly pleaded and to which I shall return, but in order to understand the case which YTO seeks to advance I shall set out its key elements:
1. The Innovative subcontract required, as part of the contact price, Innovative to remove what is known as "VENM", that is, Virgin Excavated Natural Material. It did not require Innovative to remove non-VENM, which, within the industry, is known as "GSW", that is, General Solid Waste, and which is the term, it was agreed by Counsel, that can be used to describe non-VENM;
2. As part of its adjudication claim, Innovative claimed that it had removed GSW;
3. If Innovative had removed GSW, it was a variation for which Innovative was entitled to be paid an amount in addition to the lump sum contract price;
4. In its adjudication claim, Innovative claimed that it had removed initially 70 truckloads of GSW and it claimed $7,000 per truckload, although it later reduced the number of loads claimed to 66; and
5. As part of its adjudication claim, it provided an invoice (No. 0243 from Elkordi) which had details redacted in order to conceal information in the invoice.
6. There is evidence which shows that Innovative did not pay Elkordi for the loads carried by it on the basis of those loads being GSW. The agreed rates with Elkordi were $1,250 per truckload for GSW and $500 per truckload for VENM. Innovative determined in January 2018 that it would pay a number of the loads claimed as GSW from it by Elkordi at the VENM rate, and hence, at $500 per truckload: see Exhibit B, p 52, and see Exhibit B, pp 56-57.
Innovative's response to these claims can be summarised as follows:
1. In relation to [8(1)] - [8(3)] above, Innovative agrees with YTO.
2. Innovative says that it cannot be taken to have claimed that $7,000 was the cost to it of the variation. Mr Bhatt, a director of Innovative and the person responsible for the advancement of Innovative's claims at the adjudication, says that he based the $7,000 on what Mr Yuan (of YTO) had said to him about rates paid by YTO for GSW, but whatever the basis, Innovative could not reasonably be understood to have been describing the $7,000 per truckload as the cost to it.
3. Innovative agrees that there was a redaction of invoice No. 0243 carried out by Mr Patel, an employee of Innovative, but Mr Patel asserts that that step was taken, not to falsely represent that these were 28 truckloads documented, but because he regarded the dollar figure of $145 as commercially sensitive. Mr Patel says that he did not appreciate that the invoice was not referring to truckloads, and Mr Bhatt says that Mr Patel did not tell him that he had ascertained the number of truckloads using that document to arrive at 66 truckloads. Mr Bhatt said that Mr Patel had not told him of that 'error' until March 2018, and Mr Patel corroborated that evidence.
4. In relation to the number of loads, Innovative disputes that there were not 66 loads of GSW removed, and disputes that what it said to Elkordi can be taken as evidence of what was, or was not, hauled by Elkordi from the site. In the email to Elkordi of 16 January 2018 attaching a statement as to the outstanding balance between Innovative and Elkordi, Innovative said:
"Please note that we cannot process payment for those without dockets provided."
see Exhibit B, p 48.
There is a dispute as well as to the precise form of relief to which YTO would be entitled if it establishes fraud on the part of Innovative; YTO asserting that the whole of the Determination should be set aside and Innovative asserting that, if YTO were successful, contrary to its contentions, YTO should be required as a condition of the setting aside of the Determination to pay the unimpeached part of the Determination to Innovative.
I shall turn now to the pleading issue. Mr Christie submitted that, in considering the pleadings and how strictly they are to be regarded as controlling the scope of YTO's case, it is important to bear in mind that its case is that Innovative obtained the Determination by fraud, a most serious issue and one which a plaintiff must strictly plead. He referred in this connection to Quarter Enterprises Pty Ltd and Anor v Allardyce Lumber Company Ltd and Anor (2014) 85 NSWLR 404 at [123] per Bathurst CJ (with whom Gleeson JA and Sackville AJA concurred) and Spiliotopoulos v National Australia Bank Limited [2017] NSWSC 971 per Harrison J for the following propositions, namely, that:
1. a party alleging fraud is to be held strictly to its pleadings;
2. the onus is on the party alleging fraud;
3. the fraud must be strictly proved; and
4. in assessing whether or not the fraud is proven, the Court must take into account the seriousness of the allegation: see Evidence Act 1995 (NSW), reflecting the approach laid down in Briginshaw v Briginshaw (1938) 60 CLR 336.
Mr Roberts accepted that YTO had the onus and was required to particularise the claimed fraud, but he pointed out that there were no "pleadings" in the Technology & Construction List.
I accept that the Technology & Construction List Statement and Summons are not technically pleadings, but as the Chief Justice makes clear in Quarter Enterprises (supra) at [124], even in a case where there are no pleadings, it is incumbent on the relevant party "and their legal advisers to clearly articulate the alleged fraud."
I proceed on the basis that YTO is required to strictly articulate its case of fraud and to stay within the confines of its articulated claims in the conduct of its case.
I will set out below the relevant paragraphs of the "Second Further Amended Technology & Construction List Statement" filed on 8 June 2018, and I shall refer to it as the "List Statement" from here on.
The allegation that the Determination was obtained by fraud is found at paragraph 21 of the List Statement, and I set it out in full (omitting items deleted by amendment):
"The Determination was obtained by fraud
21. In its adjudication application, the first defendant:
(a) falsely represented in respect of Variation V to the plaintiff and to the second defendant that each of the 66 loads of the excavated waste removed from the site, as identified by the first defendant at page 294 of Court Book, was GSW material in circumstances where the first defendant had itself concluded that 21 loads were VENM and 1 load was rejected as not payable at all, as follows:
28 August 2017 4 loads Originally claimed as VENM
30 August 2017 1 loads Claim rejected
7 September 2017 6 loads Claim reduced to $500 per load, being the agreed price for VENM
8 September 2017 9 loads Claim reduced to $500 per load
11 September 2017 2 loads Claim reduced to $500 per load.
Particulars
i. The representation was express.
ii. On 7 February 2018 the first defendant made the representation in its application (numbered ABCDRS NSW 163) for adjudication of its Payment Claim 5 with the ABCDRS.
iii. The defendant knew the material was not GSW because:
A. in its initial quotation numbered IQ 17067, the first defendant stated that 'Bulk and Detailed Excavation limited to VENM only' and that 'Removal of GSW material (approx. 1550 cu.m) ...by client. Client will have to give us report once GSW material removed from the site"; and
B. the first defendant contracted with its sub-con-tractor, Elkordi Earthworks Pty Limited (Elkordi), on the basis that the material was VENM.
iv. The first defendant's knowledge conclusion is contained in its amendments to the Elkordi invoice dated 15 September 2017 and its communication of that conclusion to Elkordi no later than 16 January 2018 and is also to be inferred from:
A. the fact of its deliberate alteration of the Elkordi invoice in the manner pleaded in paragraph 21(c);
B. its failure, despite repeated requests (as set out at paragraphs 28 and 29 of the affidavit of Jian Guo Yuan dated 28 March
2018), to provide documentation to support its claim that the material removed was GSW; and
C. the fact that the material removed from site was deposited at facilities that were not licensed to receive GSW, a matter that was known to the first defendant carrying on business as an excavator in NSW.
(b) falsely claimed $7000 per load as the additional costs it had incurred for the removal of 66 loads of GSW material in circumstances where the actual cost to the first defendant for the removal of the excavated material was not $7000 per load, but was much less than that amount;
Particulars
i. The claim was express.
ii. The claim was made in Progress Claim 5 at item V.
iii. The claim was made by the first defendant in its Adjudication Application, and determined by the second defendant, on the basis that the first defendant sought payment of the "additional cost for removing materials other than VENM": Determination at [150].
(c) altered an invoice of its subcontractor Elkordi Earthworks P/L (being invoice number INV-0243) te- with the intention of concealing information contained in the original invoice, including the fact that the rate per load charged to the first defendant was $145; and
Particulars
i. The invoice was altered to conceal from the plaintiff and the second defendant (or to 'blank out') all of the information contained in the original invoice under the headings "Unit Price", "GST" and "Amount AUD" and the words "Tip Fees 04/10/17 Carting to Fairfield Council Tip".
ii. The plaintiff has admitted in paragraph 45 of the affidavit of Ashish Bhatt dated 5 April 2018 that the plaintiff deliberately and knowingly "blanked out" those parts of the invoices.
iii. Had those items not been "blanked out", it would have been revealed to the plaintiff and to the second defendant that the first defendant was seeking to recover $7000 per load in circumstances where the first defendant had in fact been charged $145 a load by its subcontractor in its invoice numbered INV-0243.
(d) provided that altered invoice to the plaintiff and the second defendant in its adjudication application."
I paraphrase, in truncated form, the allegations in the List Statement to assist in consideration of them:
1. That Innovative falsely represented that each of the 66 loads of excavated waste claimed was GSW when Innovative had itself concluded that 21 loads were VENM and one claim was rejected.
2. That Innovative falsely claimed $7,000 as an additional cost per load for the 66 truckloads.
3. That Innovative altered invoice No. 0243 "with the intention of concealing information… including the fact that the rate per load charged to the Defendant was $145" and provided that to the Adjudicator in support of its claim.
YTO described, at paragraph 36 of the Plaintiff's closing submissions ("PCS"), the three respects in which Innovative misled the Adjudicator as follows:
"(a) It claimed that it had removed 66 loads at a time when it knew or had concluded substantial number of the 66 loads were not GSW at all but rather VENM;
(b) It altered invoice 0243 from Elkordi Earthworx to conceal the information that would have revealed to the Adjudicator that 28 of the 66 loads were not loads at all or at least were not loads of GSW; and
(c) It represented to the Adjudicator that it had incurred the additional cost of carting GSW that it asserted in its payment claim."
Mr Roberts contended that to be held strictly to a pleading does not mean that a plaintiff can only present evidence which is confined to the very precise words of the pleading with no latitude: see T203.31-39. He claimed, in answer to Mr Christie's contentions, that YTO had not departed from the scope of the dispute "as disclosed in the List Statement": see T203.41-204.9.
A comparison between the Defendant's closing submissions ("DCS"), paragraph 36(a), and paragraph 21(a) of the List Statement reveals a shift from the assertion that Innovative falsely represented that each of the 66 loads were GSW, when it had itself concluded that 21 loads were VENM (and it had rejected a claim for a load on 30 August 2017) to Innovative, having claimed that it had removed 66 loads at a time when it "knew or had concluded" that a substantial number of the 66 loads were not GSW, but rather VENM.
The shift may have some subtlety, but, most significantly, the assertion that Innovative falsely represented that each of the 66 loads of excavated waste removed was GSW has been excised and the word 'knowledge', removed by an amendment to paragraph 21(c) of the List Statement, has crept back in. In my view, an allegation of 'falsely representing' cannot be airbrushed out of YTO's case and an allegation of knowledge which has been deleted from the List Statement after due consideration cannot be added back in. This has particular significance here because Mr El Kordi was called as a witness in YTO's case and he gave no evidence that the waste which he carried and for which he had claimed from Innovative as GSW was not GSW. The onus is on YTO to prove that Innovative's representation that each of the 66 loads claimed to have been removed by Innovative was false. Not only has it not done so, but by calling Mr El Kordi and not having him give evidence on the topic leads to the conclusion that his evidence would not have assisted YTO's case in accordance with Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd and Anor (1991) 22 NSWLR 389 at 419 per Handley JA, followed in Savage and Ors v Lunn and Ors [1998] NSWCA 203 per Handley JA, Sheller JA and Sheppard AJA. As Mr Christie pointed out, the PCS assert that "it is not necessary to conduct an assessment of the physical qualities of the material" in order to determine if the representation was false which highlights that what YTO is advancing in the PCS, at paragraph 49-53, is not the case articulated, but a different one.
In my view, it is not open to YTO to advance the case contained in paragraph 36(a) of the PCS and it cannot establish the claim asserted in paragraph 21(a) of the List Statement if it has not first established that the representation that each of the loads hauled was GSW was false.
In relation to the second claim in the List Statement (i.e. 21(b)), I think what is now advanced by YTO is also different to what is found in the List Statement because the words "falsely claimed $7,000 as the additional costs" have been deleted and "falsely" does not appear in the PCS, at paragraph 36(c). Once again, I do not think it is open to YTO to advance a different case to that articulated in the List Statement. The starting point of the claim which YTO must establish on the case contained in the List Statement is that Innovative falsely represented that the $7,000 claimed was the cost to it per truckload. I will set out the evidence to which YTO referred in the List Statement for its contention that Innovative was claiming that it had cost it $7,000 per truckload to remove GSW:
1. The claim contained the following statement by Innovative (retaining grammatical errors):
"GSW material has been found as per agreement between YTO and Innovative - YTO supposed to supplied the clean site with site clearance certificate which didn't happened and during an excavation work, Innovative piling has found the more possible GSW/VENM other than VENM materials which needs to be removed from site during Innovative excavation work which costed additional money to Innovative and never made an allowance by Innovative to in any part of an agreement. Innovative seeking additional costs for removing materials other than VENM."
see CB, p 153.
1. The Adjudicator noted at paragraph 150 of the Determination that Innovative sought payment of the additional cost for removing materials other than VENM: see Exhibit A, page 153.
YTO's case as articulated in the List Statement at paragraph 21(b) is that, by what I have set out in [23] above, Innovative represented that it had spent $7,000 per truckload in removing excavation from the site. I think that it is possible to read Innovative's claim differently, namely, that:
1. GSW was not included in the contract;
2. it was required to remove GSW;
3. GSW costs more to dispose of than VENM (a matter not in dispute) and it was entitled to a variation; and
4. its claim for the variation was at a rate of $7,000 per truckload without any indication as to how the figure was derived.
Mr Christie raised a number of issues with this claim, including that not all of the elements of a claim in fraud relevant to this has been pleaded: see the DCS, paragraphs 63-64.
In the DCS, at paragraphs 67-68, Mr Christie sets out the reasons why he says the representation was not made:
"YTO has not established that the representation was made
67. This ground fails at the outset. The asserted representation was not made.
(a) The adjudication application does not expressly state that the amount of $7,000 is (and is no more than) the cost to Innovative.
(b) The adjudication application describes the amount of $7,000 as the "Rate" (see CB 632), not the "cost".
(c) It is manifestly unlikely that a contractor would claim just the cost to it. Profitmaking is inherent to business. A profit margin is to be expected. YTO's case assumes that, absent express statement, a contractor would reasonably be understood as doing work for free (that is, without a profit margin). That is an unrealistic understanding of the adjudication application.
(d) Further, the cost of a variation will involve a profit component. The variation was to be calculated under the Act on the basis of its value: s 9(b). Where cost is used as a criterion of value, "it will be necessary to take account not only of direct costs, but preliminaries, overheads and profits": M. Sergeant & M Wieliczko, Construction Contract Variations (Informa Law, 2014) 243. YTO could have, but did not, challenge the "Rate" claimed by Innovative in the adjudication process. That is precisely the type of matter that would come within the expertise of an adjudicator.
(e) Read fairly and reasonably, when the adjudication application (and the payment claim included in it) refer to "cost", they are referring to the cost to YTO.
68. YTO submits that "a contractor in Innovative's position would be entitled to charge profit and overheads on top of the direct cost of the work": see PS [43]. That would seem to be the end of this ground. If Innovative were entitled to charge profit on the removal of GS W, then its adjudication application would naturally be read as in fact claiming a profit margin. Any other reading is commercial nonsense."
Whilst I think it is strongly arguable that the words set out at [23(1)] above, standing alone, convey the impression that Innovative was asserting that its claim was based on what it had spent, or would have to spend, to remove GSW, I do not think it is clear that Innovative was claiming that the $7,000 was the cost to it of so doing. It is, at the very least, open to treat the words used, coupled with the reference to 'rate' in the context of a claim for variation as meaning that YTO was seeking the amount of $7,000 as the cost for the variation to YTO, not the cost to Innovative. Otherwise, as Mr Christie contends, Innovative would be claiming as a variation only the amount it had paid to its subcontractor which would be most unusual. Further, Innovative did not present invoices and receipts with amounts included to demonstrate that it had paid $7,000 per truckload. The Adjudicator awarded the $466,800 claimed for the GSW removal by Innovative as the "value", not the "cost": see Exhibit A, p 154. This is reinforced by Mr Bhatt's evidence that he himself had said that $7,000 per truckload was the amount that he had decided Innovative should charge YTO, i.e. not the cost to Innovative: see Exhibit A, p 323, paragraph 73. He was not challenged on that evidence and it does not seem inherently implausible because, again, Innovative would not, on a variation, be likely to charge only the amount that it had paid to a subcontractor.
I am, therefore, not satisfied that YTO has established that the representation as asserted in the List Statement at paragraph 21(b) was made out.
In relation to the third claim as contained in the List Statement, at paragraph 21(c), this alleges that Innovative altered an invoice with the intention of concealing information from YTO and the Adjudicator, the information being that Innovative had in fact been charged $145 per load by its subcontractor which would have revealed that Innovative was seeking to recover $7,000 per load when it only cost it $145 per load. What is now being asserted in the PCS, at paragraph 36(b), is that Innovative redacted the information because it did not establish 28 loads were carried and "dishonestly claimed that its subcontractor had removed and disposed of 28 loads" (see paragraph 21 of the Plaintiff's opening submissions). Mr Christie contended that redaction of documents very often does involve concealing something and that an intention to conceal is not of itself fraudulent. Mr Patel accepts that he did redact the document and did intend to conceal the details of the charges, although, as I have noted, his explanation is that the redacted material is commercially sensitive. Mr Christie points out that, to maintain the case that YTO now seeks to run, it would have been necessary for YTO to plead (and establish) that Mr Patel redacted the invoice with the intention of misleading or deceiving the Adjudicator, or having redacted it that he knew that it would mislead or deceive the Adjudicator (see DCS, paragraph 80). I would add that YTO would also need to include a precise iteration of what it was that the redacted document was intended to specifically convey. I think that paragraph 21(c) of the List Statement does specify what YTO says was being concealed by the redaction, i.e. that Innovative was being charged $145 per truckload for GSW, but that is not what is now asserted in the PCS. I accept Mr Christie's submission that the allegedly fraudulent conduct now asserted by YTO has not been adequately pleaded.
I therefore hold that the claim articulated in paragraph 36(b) of the PCS is not within YTO's List Statement and cannot be maintained.
The claim in paragraph 21(c) of the List Statement identifies that the specific information which was concealed was "the fact that the rate per load charged to [Innovative] was $145" and the particulars (i.e. paragraph 21(c)(iii) of the List Statement) refer to the fact that Innovative had in fact been charged "$7,000 per load in circumstances where the first defendant had in fact been charged $145 a load by its subcontractor". The case articulated in the List Statement has not been made out because:
1. the unredacted invoice did not show that Innovative had been charged $145 per truckload for the material hauled;
2. Mr El Kordi's evidence was that the $145 was a call out fee charged when no fill was loaded into a truck: see T23.21-24.23. Innovative was not charged $145 per truckload of GSW or VENM; and
3. as I have mentioned in dealing with the second claim, I do not think it is established that Innovative was claiming that it had paid $7,000 per truckload.
Because of the view which I have expressed concerning YTO's claim and, in particular, the pleading issue, I do not think it is appropriate to venture upon a consideration of credibility of witnesses called by YTO and Innovative; nor is it necessary to deal with the other issues ventilated by Counsel in their submissions, including the question of what relief would be appropriate.
It follows that YTO has failed to establish, in accordance with the onus placed upon it, that the Determination was obtained by reason of fraud. It follows that the Plaintiff's Summons should be dismissed and that the Plaintiff should pay the costs of the First Defendant, as agreed or assessed.
I will hear the parties on the appropriate form of orders in relation to the funds in Court.
[2]
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Decision last updated: 20 December 2018